In order to enhance bank lending to MSMEs, the Ministry of Finance and the RBI are in talks to ease certain 'risk-weight' guidelines for lending to MSMEs and align them to globally accepted benchmarks.
In a bid to provide the much-needed relief to micro, small and medium enterprises (MSMEs), the Reserve Bank of India (RBI) and the government are expected to reach a consensus on easing certain norms in prompt corrective action (PCA) norms that will help public sector banks start lending to MSMEs, which have of late been facing credit availability problem, The Indian Express reported citing people close the matter.
MSMEs are the backbone of the Indian economy as they contribute about 32% of the gross GDP, 45% to manufacturing output and 40% of India’s exports. Also, the segment is also the largest employer in the country, after agriculture.
The Ministry of Finance and the RBI are in talks to ease certain ‘risk-weight’ guidelines for lending to MSMEs and align them to globally accepted benchmark of a maximum of 75% risk weight for smaller companies as compared with present 150% risks weight for both rated and unrated MSME loans.
Another issue which is expected to be resolved is to extend the classification criteria for loans provided to MSME as a standard asset. In June, the RBI had allowed NBFCs and banks to classify any due pending for up to 180 days from all MSMEs in the country as a ‘standard’ asset in their books. This relaxation is expiring in January 2019, after which banks will go back to 90-day norm, in a staggered manner.
“Discussions on the rules governing lending to MSMEs are currently underway. There is no demand for any special package or disregarding any prudential regulation. The idea is to align our lending norms and risk weights to globally accepted benchmarks,” the newspaper reported citing two officials familiar with the development.
Risk weight is capital that has to be set aside by banks or housing finance companies while extending loans. Norms for the same for banks are set by RBI and y NHB for housing finance companies. These norms are based on risk assessment for each type of asset and therefore an asset, which is considered to be riskier, calls for higher risk weight.
At present, 11 out of the total 21 public sector banks come under the PCA framework of the central bank, and therefore MSMEs are facing funding crunch from both public sector banks and NBFCs. Any final decision on this, however, is unlikely to be taken at the central board meeting of RBI to be held on November 19. It is expected to be announced separately, sources said.